Determine pricing structure for financial portfolio management software
November 11, 2013 8:01 PM Subscribe
With a couple of friends we are building a very sophisticated system that we believe is vastly superior to anything currently on the market. Our aim are independent financial management companies of any size in Europe (those non-bank companies that manage people's investments by buying and selling stocks, bonds, funds,...). The current market practice heavily penalises the small companies and only few of them can afford a good system. We want to change that.
The current market practice is to charge companies as follows:
- a one-time setup fee usually dependent on the company's size (number of users, assets), but normally quite high (equivalent to 3-4 years of yearly fees)
- a yearly fixed amount for the basic product
- another yearly fixed amount for any additional modules/features (the basic product is usually quite lame)
- a yearly maintenance fee as a percentage of the above (for the updates etc.)
- some providers charge an additional yearly fee per user
This structure usually doesn't allow smaller companies to either buy the system in the first place (high setup cost) or to access all the features as the separate modules are expensive.
We want to change that: we want to offer the fully-featured product to any company, no matter the size, with the idea that if the company grows, our revenue will grow too. But we need to come up with a pricing structure that still works... so the easiest concept is to subsidise the smaller companies by charging more to the big ones, but the problem is that it's much harder to get the big ones. So we risk ending up with 100 small companies that make no money.
Here are the parameters we can use to charge (but we might be missing something right here):
- number of users
- number of clients
- number of transactions per year
- size of the client base
- company's revenue (maybe)
We have thought of many structures, but nothing that can really make sense for the whole spectrum of companies, as every business is different and there is no linearity. For example, one company may have 100 clients, with $1bn in assets and 3000 transactions per year. Another one might have 100 clients, with $250mn in assets and 7500 transactions per year. It's almost impossible to picture the typical company.
Since we are stuck here, I'm wondering if anyone can come up with a different way to look at the problem. Examples of how it's done in different industries with similar problems would be really great! I'm really open to hear anything!
The current market practice is to charge companies as follows:
- a one-time setup fee usually dependent on the company's size (number of users, assets), but normally quite high (equivalent to 3-4 years of yearly fees)
- a yearly fixed amount for the basic product
- another yearly fixed amount for any additional modules/features (the basic product is usually quite lame)
- a yearly maintenance fee as a percentage of the above (for the updates etc.)
- some providers charge an additional yearly fee per user
This structure usually doesn't allow smaller companies to either buy the system in the first place (high setup cost) or to access all the features as the separate modules are expensive.
We want to change that: we want to offer the fully-featured product to any company, no matter the size, with the idea that if the company grows, our revenue will grow too. But we need to come up with a pricing structure that still works... so the easiest concept is to subsidise the smaller companies by charging more to the big ones, but the problem is that it's much harder to get the big ones. So we risk ending up with 100 small companies that make no money.
Here are the parameters we can use to charge (but we might be missing something right here):
- number of users
- number of clients
- number of transactions per year
- size of the client base
- company's revenue (maybe)
We have thought of many structures, but nothing that can really make sense for the whole spectrum of companies, as every business is different and there is no linearity. For example, one company may have 100 clients, with $1bn in assets and 3000 transactions per year. Another one might have 100 clients, with $250mn in assets and 7500 transactions per year. It's almost impossible to picture the typical company.
Since we are stuck here, I'm wondering if anyone can come up with a different way to look at the problem. Examples of how it's done in different industries with similar problems would be really great! I'm really open to hear anything!
Hoo boy, software pricing. It is a Hard Problem.
How do the people who will be using your software interact with it? Pricing according to the number of company employees using the software seems most likely to be a good proxy for "ability to pay" that your customers would still be okay with. You could require each employee to have an individual login, or have a pool of licenses that supports some limited number of concurrent users.
How much will your costs be to set up the software for each company? Are you providing support yourselves or subcontracting it out? You want to think of a pricing scheme that will still let you make money even if all your customers are small companies, perhaps by making a more off-the-shelf solution that saves you the labor involved in customizing or setting up the software.
posted by fermion at 10:23 PM on November 11, 2013
How do the people who will be using your software interact with it? Pricing according to the number of company employees using the software seems most likely to be a good proxy for "ability to pay" that your customers would still be okay with. You could require each employee to have an individual login, or have a pool of licenses that supports some limited number of concurrent users.
How much will your costs be to set up the software for each company? Are you providing support yourselves or subcontracting it out? You want to think of a pricing scheme that will still let you make money even if all your customers are small companies, perhaps by making a more off-the-shelf solution that saves you the labor involved in customizing or setting up the software.
posted by fermion at 10:23 PM on November 11, 2013
The problem with pricing strictly per user for small companies is that they will try to skimp by buying less than they need. You will end up with, say, a 10-person shop with only two High Priests with a license to use the system and nobody will be happy: your product won't get used the way it's supposed to be, the users will get work heaped on them by the non-users and your product will be invisible to most of the company most of the time: management will only hear about it when there's a problem, or when somebody uses The System as an excuse.
posted by Dr Dracator at 10:45 PM on November 11, 2013
posted by Dr Dracator at 10:45 PM on November 11, 2013
This thread is closed to new comments.
Say, .01% of $100 million under management, .005% of $1billion-plus under management.
posted by dfriedman at 8:04 PM on November 11, 2013